Tender Offer Tax: Selling Startup Shares in a Secondary

How is selling startup shares in a tender offer taxed?

Selling shares you already own in a tender offer or secondary sale is usually a capital gain or loss: the price minus your basis. The gain is long-term if you held the shares more than one year, and short-term (taxed at ordinary income rates) if not (IRS Topic 409). Basis is what you paid for the shares plus any amount already taxed as pay when you got them (Publication 525).

Capital gain may also owe the 3.8% net investment income tax when modified adjusted gross income is above $200,000 (single) or $250,000 (married filing jointly).

A tender is not simple when the price is above the 409A value, you sell ISO shares or exercise and sell at once, the company is the buyer, the shares may be QSBS, or you moved states or live in Canada. Gather the offer documents (who buys, the price, who may sell), the latest 409A value, grant and exercise records, any 83(b) election, Form 3921, your W-2 and last year's return.

Is the price above the 409A value taxed as pay?

It can be, and the answer depends on the facts. Gross income includes compensation for services, and section 83 taxes property received in connection with services as pay. Neither gives a rule written for tender offers, and the IRS publications cited here do not address tender premiums, so treat the point as unsettled.

The company decides whether to treat part of the price as wages and withhold; that side is covered in granting stock options after a valuation. Report the sale consistently with your Form W-2 and Form 1099-B. If the company treats nothing as pay but the terms look like the left column, get advice before filing.

Do I have to exercise options first, and what does exercise-and-sell do?

When the offer buys shares, only shares count, so vested options must be exercised by the offer's deadline to take part. Exercising and selling in the same offer taxes the spread at exercise as pay; the sale itself then adds little gain if the price equals the value used at exercise.

• Nonqualified options (NSOs): for an employee, the spread (value minus exercise price) is wages on Form W-2, box 12 code V, with withholding; a contractor gets Form 1099-NEC instead (Publication 525). Any difference between the sale price and that value is short-term gain or loss.
• Incentive stock options (ISOs): selling in the same offer is a disqualifying disposition (next section). Because the shares are sold in the year of exercise, no alternative minimum tax adjustment arises (Publication 525).
• Offers that buy the options themselves: money received for a nonqualified option without a readily determinable value, sold at arm's length to an unrelated buyer or to the company that granted it, is pay as if you had exercised (Publication 525; 26 CFR 1.83-7(a)). Read how the offer treats ISOs.

For exercise taxes, forms and timing, see exercising startup stock options.

Is selling ISO shares in a tender a disqualifying disposition?

Yes, if you sell before the later of two years after the grant and one year after the exercise (26 U.S.C. 422(a)(1)). The spread at exercise (value at exercise minus exercise price) becomes pay in the year of sale; the rest of the gain is capital gain, short-term if held one year or less (26 CFR 1.421-2(b)).

• The pay goes in Form W-2, box 1. It is not subject to Social Security, Medicare or federal unemployment tax, and income tax withholding is not required (Publication 15-B).
• If the sale price is below the value at exercise, the pay is limited to the actual gain (26 U.S.C. 422(c)(2)).
• After both periods, the sale is a qualifying disposition: the whole gain over the exercise price is long-term capital gain. If you exercised in an earlier year, your basis for alternative minimum tax differs; see AMT on incentive stock options.
• A company buyback of ISO shares is also a disqualifying disposition when early; section 302 then decides the character of the rest (1.421-2(b), Example 2).

Is it different when the company buys the shares back instead of an investor?

Yes. A company buyback is a redemption, and it counts as a sale only if it passes one of the tests in section 302(b); otherwise it is a distribution under section 301: a dividend to the extent of the company's earnings and profits, then a reduction of basis, then gain.

Shares owned by family members and related entities count as yours (section 302(c)). Selling a small slice while many holders also sell may not lower your percentage enough. A company buyer also makes the pay question above harder to answer in favor of a sale.

A buyback can also affect QSBS: shares the company issued to you within two years before or after it bought stock from you or a related person, and stock issued to anyone within a year before or after buybacks above 5% of its stock, can lose QSBS status (section 1202(c)(3)); see the QSBS guide.

Does selling now cost me the QSBS exclusion?

Shares sold before the QSBS holding period ends get no exclusion; their gain is taxed like any other capital gain. Shares you keep run on their own clock, and selling some does not reset it.

The tiers come from Public Law 119-21, section 70431. If you held the shares more than 6 months, a section 1045 election can defer the gain when you buy other QSBS within 60 days; see rolling over QSBS gain. Whether your shares qualify is in the QSBS guide, and state treatment in state tax on QSBS gains.

Why doesn't my 1099-B match, and how do I fix it on Form 8949?

For option shares granted after 2013, the basis on Form 1099-B leaves out the amount you were already taxed on as pay. Add that amount to basis on Form 8949 with code B in column (f), as the Form 8949 instructions direct; otherwise the same income is taxed twice.

1. Collect Form 1099-B, Form W-2, Form 3921 and the offer's settlement statement.
2. For each lot, figure true basis: what you paid plus any amount taxed as pay at exercise or on a disqualifying disposition.
3. Enter the 1099-B basis and the code B adjustment, or the correct basis, as the instructions say for the box checked.
4. Check the holding period: Part I for one year or less, Part II for longer.

A private sale may produce no Form 1099-B. Report it anyway, in Part I with box C or Part II with box F, using net proceeds (Form 8949 instructions). If part of the price appears as wages on your W-2 and the full price also appears as proceeds, the instructions name no code for that case (their catch-all is code O, an adjustment not explained elsewhere); keep the company's statement of the split and have the adjustment reviewed.

Will tax be withheld, or do I need an estimated payment?

Usually nothing is withheld from the capital gain part of a sale. Pay from an NSO exercise, or a premium the company treats as wages, is withheld as supplemental wages, often at a flat 22%, or 37% on supplemental wages above $1 million in the year (Publication 15). Pay from an ISO disqualifying disposition need not be withheld at all.

You generally owe estimated tax if you expect to owe $1,000 or more after withholding. The penalty is avoided when withholding and payments cover 90% of this year's tax or 100% of last year's (110% if last year's adjusted gross income was over $150,000) (Publication 505). Make the payment for the period the sale falls in; the annualized income installment method in Publication 505 can lower earlier payments when the sale comes late in the year. Employers also withhold the 0.9% Additional Medicare Tax on wages above $200,000 in the year.

Example

These examples are illustrative and use US dollars.

Employee sells above the 409A value

An employee sells 10,000 shares at $10 in a tender run by the company. The 409A value is $6. She got the shares two years earlier by exercising options at $1 when they were worth $1, so her basis is $10,000. Assume the buyback passes a section 302 test, so it counts as a sale.

• If the $4 premium is treated as pay: $40,000 of wages on her W-2, and $50,000 of long-term gain ($60,000 minus $10,000).
• If it is not: $90,000 of long-term gain.

If her Form 1099-B shows $100,000 of proceeds and her W-2 also shows the $40,000, she adjusts Form 8949 so the $40,000 is taxed once.

ISO shares sold six months after exercise

An employee exercised ISOs on 10,000 shares at $1 six months ago, earlier the same year, when the value was $6. She sells them to an outside investor at $10, the price every seller gets, so no part of it is pay.

• The sale is a disqualifying disposition: $50,000 ($6 minus $1, times 10,000) is W-2 pay, with no required withholding.
• Basis becomes $60,000, so the remaining $40,000 is short-term capital gain.
• Form 1099-B may show basis of $10,000; code B on Form 8949 corrects it to $60,000. An estimated payment is likely needed.

Founder sells shares issued after July 4, 2025

A founder was issued 200,000 shares in September 2025 for $20 and sells them to an investor in November 2026 at $5 each, for $1,000,000. Assume the shares otherwise qualify as QSBS.

• November 2026: held more than one year, so the $999,980 gain is long-term. Held less than three years, so no QSBS exclusion.
• Within 60 days of the sale: buying other qualifying QSBS could defer the gain under section 1045.
• Had the founder waited until September 2028, a qualifying gain could have been 50% excluded.

Different for you?

• Your shares may be QSBS, or you sold before the holding period: check QSBS for founders and early employees and rolling over QSBS gain.
• Part of the price may be pay, or the company is buying back a large stake: the character turns on the facts; get individual tax help before filing.
• You exercised ISOs in an earlier year: see AMT on incentive stock options.
• Your state taxes the gain, or you moved: see state tax on QSBS gains and moving before selling startup shares.
• The whole company is being sold: see taxes when your startup is acquired.
• You live in Canada: see Canadian founder selling US startup shares and cross-border tax help.
• You run the company's side of the tender: see granting stock options after a valuation.